LME And Rusal Back In U.K. Court Over Warehousing Rules

This week the London Metal Exchange went back to court in the U.K. as it tries to change the way metals are delivered around the world, in an attempt to reduce controversial delays. The LME had been blocked by United Company Rusal, the world’s largest aluminum producer, which claims the LME has not consulted its market fairly regarding the planned rule changes.

What’s the issue?

The LME, owned by Hong Kong Exchanges & Clearing Ltd., wants to force warehouses with delivery backlogs of more than 50 days to ship out more metal than they receive, reducing lengthy delivery bottlenecks. It was bowing to complaints, particularly from metal buyers such as auto parts suppliers, about waiting times at some LME warehouses. In some extreme cases, companies have to wait more than two years before they can get hold of the metal they’ve bought.

These enormous queues developed as some metals, particularly aluminium, became popular in their use in financing deals, to be pledged as collateral to secure loans. This practice tied up batches of metal and restricted delivery of aluminium and other metals including copper and zinc, to customers that actually use the metals in question.

The long delays have pushed up premiums buyers must pay on top of metal prices for easier access to and handling of metal.

What does Rusal say?

Rusal’s main issue is the procedure adopted by the LME to make the changes, rather than the changes themselves.

It argued back in February, that the LME didn’t consult properly with its customers last year before announcing the changes. It even claimed that the LME breached its “human rights” by interfering with its economic interests.

In March a U.K. judge agreed with Rusal, in part, and said the LME’s consultation was “unfair and unlawful.” At the heart of the debate is the idea that the LME did not properly consult on one particular alternative strategy: cap the rent charged by warehouses to hold on to metals.

Rusal had originally said that the LME’s change would cost it “at the very least tens of millions of pounds.” But in court this week for the appeal, Rusal’s lawyer, Monica Carss-Frisk, played down the financial concerns and zeroed in on the alleged unfairness of the consultation. The firm has also said it believes the LME’s proposal “would have little material effect on warehouse queues.”

“Rusal brought its judicial review application in order to raise critical concerns about the management of the LME’s market…it remains confident that the Court of Appeal will sustain that judgment,” the company said in a statement Wednesday.

What does the LME say?

The LME chose to appeal the ruling rather than begin a new consultation process. The exchange argues it was under no obligation to consult on alternatives, such as the rent-capping proposal.

Its lawyers also asserted this week that the LME’s customers are a “sophisticated” audience and that Rusal was not unaware of the notion of capping rents.

The LME does, however, say that it studied the rent-capping option during the consultation, but dismissed it after legal advice raised an issue regarding competition law.

The LME’s barrister, Michael Beloff, on Tuesday said in court that Rusal gains from the long queues and relies on the high premiums which companies are forced to pay to get their hands on actual metal.

“The LME will analyse the content of any judgment and will update the market on its proposed way forward as soon as possible afterwards,” the exchange said in an emailed comment Tuesday.

What’s next?

The appeals panel of three judges hasn’t indicated when it will hand down its decision. One major complication: The court’s summer recess begins on August 1 and the judges won’t return until October 1. It’s unclear whether a decision could be announced during this time.

If the LME wins, it will likely implement the rule changes as soon as possible. But if Rusal is victorious, the exchange would most likely have to redo its consultation on the existing changes, or go for a different tack altogether.